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Has MDU Resources Become the Perfect Stock?

Finding companies that have all the right stuff can produce winners.

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if MDU Resources (NYSE:MDU) fits the bill.

The quest for perfectionStocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.

Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.

Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.

Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.

Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.

Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at MDU Resources.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

0.1%

Fail

1-Year Revenue Growth > 12%

0.9%

Fail

Margins

Gross Margin > 35%

22.9%

Fail

Net Margin > 15%

5.3%

Fail

Balance Sheet

Debt to Equity < 50%

59.3%

Fail

Current Ratio > 1.3

1.20

Fail

Opportunities

Return on Equity > 15%

8.0%

Fail

Valuation

Normalized P/E < 20

18.97

Pass

Dividends

Current Yield > 2%

3.1%

Pass

5-Year Dividend Growth > 10%

4.3%

Fail

Total Score

2 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at MDU Resources last year, the company has seen its score drop by a point, as its current ratio deteriorated somewhat. The stock has also largely stalled out, with less than a 10% gain over the past year.

As a result, MDU has taken advantage of the situation to diversify. On one hand, MDU has become an exploration and production company in its own right. But it's also helping to provide construction-related services through its production and sale of construction aggregates, asphalt, and other building materials to accommodate the huge rise in demand in the area.

Like many utilities, MDU has been a consistent dividend payer, weighing in with more than two decades of annual dividend increases, joining Consolidated Edison (NYSE:ED) as a Dividend Aristocrat earlier this year. It will be interesting to see how the company does going forward, though, given that it has a capital-intensive energy business under its belt now.

For MDU to improve, it needs to reconcile the high-growth potential of its energy business with the stability of its utility business. That hybrid will take some getting used to, but it could result in the stock reaching higher toward perfection more quickly than it otherwise would.

Keep searchingNo stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add MDU Resources to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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